The strong pound means investors could profit from buying shares abroad. Our
graph illustrates where the pound has strengthened to identify the
investment bargains

The pound in your pocket stretches further than three years ago in almost every other major country in the world. For example, each £1 will buy more American dollars, $1.71 in fact, than at any time in the past six years.

It is excellent news for holidaymakers and property buyers, whose savings are worth more of the local currency. But there are also implications for investors. When you buy shares in a different country, you effectively have to convert your pounds into the foreign currency in which they are priced. The reverse is true for selling. So exchange rate movements can present buying opportunities – albeit risky ones.

Say £1 bought a $1 share in an imaginary US oil company, AmOil. If, three years later, the exchange rate was £1 to each $2, the pound would have “strengthened”. If AmOil’s share price was still $1, the holding would covert into 50p, crystallising a loss.

If the pound had “weakened”, the investor would be in profit. For example, each £1 might be worth just 50 cents; so the $1 AmOil share would be worth £2. Because the pound is strong at the moment, thanks to the returning health of the British economy, investors buying now are more likely to profit.

There is talk of a correction, with HSBC Private Bank predicting a “pause” and “potential reversal” in the coming months. However, currency movements are difficult to predict, and Shaun Port of wealth manager Nutmeg said the pound was still worth less against other currencies than in the 10 years before the financial crisis.

Ben Yearsley of stockbroker Charles Stanley said: “You want a strong pound when you buy and a weak pound when you sell. But don’t try to be too clever. Only if a currency is clearly out of kilter and at an extreme – perhaps if the pound was worth $2 in America, for example – would it be a clear-cut opportunity to turn a profit.”

Brian Dennehy of broker FundExpert.com said: “Trying to trade short-term to exploit currency is a bit of a mug’s game, and few succeed.” The golden rule is: invest only in shares, funds or regions that you would pick if currency was not a factor. Then see where the pound has strengthened to identify bargains. We’ve rounded up the changes in the graphic, above.

Biggest movers

We compared how much £1 would buy in the major foreign currencies today against the first week of July 2011. This was merely to demonstrate the short-term improvement in the pound. Look up historic currency movements in more detail at XE.com.

The data, compiled by currency firm FairFX, showed that the pound stretched considerably further than three years ago in Brazil, South Africa, India and Turkey. In July 2011 each £1 bought 2.50 Brazilian real. Last week it bought 3.78 real. Similarly, £1 bought 12.73 South African rand in 2011, compared with 18.29 this year. There was less fluctuation against the euro and US dollar. Each £1 bought $1.60 in July 2011, just 6pc less than the $1.71 it buys today. Investors can get 11pc more euros for their pound than three years ago.

Yet the investment analysts we questioned said the weakness of the American dollar in fact presented the best opportunity. Mr Dennehy said: “The very long-term charts suggest that the pound will fall back against the dollar again.” He said the same trends were not evident in India, Russia, South Africa or Brazil, where currency prices have barely moved since late 2013. Darius McDermott of Chelsea Financial Services, the fund shop, said he expected the pound to weaken against the dollar within two years, benefiting funds that invest in America.

Buying shares

Major stockbrokers, such as Hargreaves Lansdown, Barclays Stockbrokers and TD Direct Investing, offer phone and internet dealing in foreign shares, as do specialists. Costs are around £12 per trade. Brokers make money by using foreign exchange to their advantage.

British investors have flocked to the US recently for the flotation of shares in Facebook and Twitter, the social media giants. Further afield, a number of Swiss companies are among the world’s best dividend payers. Food giant Nestlé and drug firms Novartis and Roche are among the top 50, according to Société Générale. Oil giant Total in France and Westpac bank in Australia also pay strong dividends.

Paul Kavanagh of stockbroker Killik & Co warned that a strong pound reduced the value of dividends declared in other currencies; each dollar of dividend, say, converts back into fewer pounds.

Buying funds

If you want exposure to firms in America, a tracker fund that mirrors its market may be suitable. The Fidelity Index US charges 0.1pc a year. Exchange-traded funds (ETFs) can be even cheaper: the iShares S&P 500 Ucits ETF costs 0.07pc. It typically costs around £10 to buy an ETF.

If you prefer a manger to cherry-pick investments, Mr McDermott tipped JP Morgan US Equity Income and Axa Framlington American Growth. The former costs 0.93pc a year and has returned 41.2pc in three years, compared with 34.9pc for the American market. The Axa fund has returned 27.5pc and costs 0.82pc. Mr Dennehy suggested the M&G Global Macro Bond fund, which was “acutely positioned” to exploit the strength of the pound against the dollar as it buys debt from companies. It has risen just by 6.3pc in three years compared with 6pc for funds of its type and costs 0.81pc.

Investors keen on markets further afield tend to fare better with actively managed funds. However, many managers still fail to beat the market. If you are investing for the long term and want to do so cheaply, Mr Port recommended a number of emerging market tracker funds. In Brazil, he tipped the iShares MSCI Brazil ETF (which charges 0.74pc); in Russia the HSBC MSCI Russia Capped ETF (0.6pc); in South Africa the iShares MSCI South Africa ETF (0.65pc); for India the DB X‑Trackers MSCI India ETF (0.75pc); and in Turkey the iShares MSCI Turkey ETF(0.75pc).

You can sometimes buy funds that strip out the effect of currency by “hedging”. Mr Port said investors keen on the US should use the iShares S&P 500 Hedged ETF, which costs 0.4pc, for this purpose, or the UBS MSCI Japan Hedged ETF for Japan, which costs 0.45pc.

Recommended actively managed funds include Lazard Developing Markets, which is 20pc lower in three years compared with the 7.9pc average for emerging markets, and the Templeton Emerging Markets investment trust, down by 10pc.